Sales price dip drives up residential yields
Residential sale prices in Dubai continued to decline in the third quarter of 2015 compared to the previous quarter, Phidar Advisory said in its Q3 research note.
The sale price decline will continue through 2017, driven by geopolitical risk, US dollar strength, low oil price and the impact on regional capital flows among other factors, Phidar said in the report.
Anecdotal evidence indicates distressed sales and exchange rate-motivated sales continue.
In Q3, apartment lease rates decreased a nominal -0.5 per cent, while sale prices decreased 3.6 per cent, pushing yields up to 7.5 per cent.
Lease rates for villas decreased 1.5 per cent and sale prices decreased 3.4 per cent, pushing yields up to 4.8 per cent, according to Phidar.
"The sale price decline continues to outpace rent decline primarily due to liquidity constraints and the changing cost of capital. There is capital available to deploy in Dubai real estate, but that capital seeks higher returns due to perceived geopolitical and market risk increases. Until those yields adjust, demand to purchase real estate will likely fall far below the inventory available to purchase," Jesse Downs, managing director of Phidar Advisory, told Khaleej Times.
The rental market, meanwhile, is dictated by supply of inventory and demand from residents. "Although rents are softening and there are concerns about slowed job growth, the gap between supply of rental inventory and demand is not as wide as in the sales market," Downs added.
"Essentially, new investment demand is capable of very quick shifts. In comparison, rent demand is dictated by demographics and it takes time for economic shifts to filter through to employment and demographic trends."
Phidar's Dubai Real Estate International Demand Index fell significantly in the first three quarters of the year, driven primarily by currency fluctuations. This indicates a low propensity for international real estate investment into Dubai.
Additionally, the report claimed that the quantity of announced residential projects in Dubai has reached a saturation point.
"There is no reason to panic because some announced and even launched projects are not viable, so handover is not expected in the stated timeframe," said Downs. "However, developers and other stakeholders should monitor this carefully and plan appropriately," she added.
Phidar's supply estimates include only those projects actively under construction. Based on supply estimates, the five-year forecast for supply is 2.8 per cent compound annual growth rate (CAGR) whereas the demand has a robust 5.8 per cent CAGR, largely due to jobs created by Expo 2020, which should start to ramp up in 2018.
However, when supply estimates include launched or announced projects without site progress, the five-year supply CAGR jumps to 5.9 per cent to 6.7 per cent.
If all active construction projects and launched projects as well as a portion of announced projects are completed in five years, then the supply-demand dynamics should stay in relative equilibrium. This implies there is limited need for additional residential developments in the next five years, based on current economic forecasts, the report added.